Microlenders Provide Financial Lifeline to Online Enterprises

Erik Jimenez needed $1,000 right away to buy 200 used guitars he could sell from his online store.

He couldn’t get a conventional loan or line of credit from a bank because his business of selling vintage and custom music instruments was too small. But the Bellflower, Calif., resident knew how to use social media to generate sales — and that’s what was important to a company called Kabbage Inc.

The Atlanta microlender, which provides small online businesses with funding ranging from $500 to $40,000, signed the deal. Jimenez got his cash.

“For me, the more money I have access to, the more money I can potentially make,” a delighted Jimenez said.

The explosion of online sellers through sites such as eBay, Fab, Etsy and Pinterest has been a boon for entrepreneurs looking to sell a broad assortment of items including used CDs and handmade scarves. But finding a traditional bank to make small-business loans to virtual stores has been a tough sell — and has opened the door to niche players.

Kabbage is one of a number of new lenders that look beyond credit scores to make an assessment, and put more weight on UPS shipping information, Amazon and PayPal records to assess the probability that they’ll get their money back from a particular loan applicant. The lenders also look at how much potential borrowers use Twitter and Facebook to promote their products.

Rob Frohwein, Kabbage’s chief executive, said all those data points help give Kabbage a “360-degree view” of how online merchants operate their business. “The more we know about you, the less risk there is for us and the more capital we can lend at more attractive rates,” he said.

“If the local bank wasn’t so risk-averse, and if they understood technology better, they would be doing this lending,” said Stephen Howard-Sarin, eBay’s head of marketing in North America. “But they don’t understand.”

Technological innovations and the opportunity for online sellers to avoid a sales tax have allowed online commerce to transcend the economic problems that have punished some bricks-and-mortar operations.

Growth in online purchases is expected to continue, according to a report by EMarketer, a digital media and commerce data collector. The report states that consumers have shown confidence in online commerce, with 58 percent saying they will spend more money online in 2012. And 70 percent of all Internet users ages 14 and older made at least one online purchase last year.

E-commerce grew 16.1 percent in 2011, and sales are expected to grow to $361.9 billion in 2016 from $194.3 billion in 2011, or about 13 percent a year, according to the report. Investment firms Robert W. Baird and JPMorgan expect e-commerce to grow more than 12 percent this year.

Small businesses are hungry to latch on to the e-commerce momentum, and microlenders are casting a wide net to reel in as many customers as possible. Lenders such as On Deck Capital and Kabbage attract these small businesses because getting a loan from them is quick and easy.

But the interest rates can be high.

On Deck’s interest rates run 18 percent to 36 percent, but Chief Executive Noah Breslow said they are able to remain competitive with traditional banks because the loans are typically up in three to eight months.

“I think the bottom line is people value speed and convenience,” Breslow said. “A business owner can go online with us and get approved basically within minutes and then get funding in their account the next day.”

His company, which has lent money in all 50 states, has provided more than $250 million to merchants.

Kabbage has a similar strategy. The company said it gives advances — not loans — and expects a 2 percent to 7 percent fee over a six-month period and charges a higher fee in some cases for speed and convenience.

The need for quick cash is what brought Jimenez to Kabbage.

Jimenez secured the loan at 5 percent interest and paid it off in the first month with the proceeds from the guitars. He made about $38,000 last year and has around $35,000 in sales in 2012.

In 2004, Ed Harmon also struggled to get loans from traditional lenders. He said banks turned him down flat because his online store, which sells water sports equipment such as wake boards and boat supplies, had just started and was based online.

“They basically told us, ‘You guys are such a new business it’s hard for us to really get behind that and jump in with a big line of credit because you’re Internet, and Internet scares us,’ ” he said.

Harmon was eventually able to secure a loan from a bank, but he found the hours of traditional lenders sometimes made it hard to get money when he needed it.

Last year, one of Harmon’s employees suggested the company take advantage of a good deal on some skateboards. It was late at night on a weekday and all the banks were closed, but he needed money right away to cash in on an attractive wholesale deal.

He borrowed about $4,000 from Kabbage.

“Using that Kabbage money did jump-start us to selling the 2,000 skateboards,” he said. “Being able to grab the Kabbage money allowed us to do it then instead of waiting until later.”

If Harmon needs more money in the future, he’d consider Kabbage as an option.

“Down the road, if I were to borrow more money, the interest rate is something I’d have to scrutinize,” he said.